Why the poor remain poor

“Vera, you bought bottled water for €2,50 and you live in a country where tap water is not only free but at least as good as the water in that bottle that you paid for. You obviously have more money than you need.”

My friend was right. It is indeed ridiculous that we are still buying bottled water: see the Story of Stuff’s great video about this here. So, I have decided to stop buying water (and a bunch of other things I buy out of laziness) and donate this money to charity instead. But which of the gazillions of charities should I support? Burdened by to many options, I turned to GiveWell’s top-charity list. GiveWell performs rigorous research to annually select three charities that have demonstrated high cost-effectiveness and are underfunded.

GiveWell’s current nr. 1 charity is GiveDirectly (the similarity in names is a coincidence). This charity gives cash to poor families, no strings attached. In spite of their excellent ranking, I felt hesitant to support them. Would such a simple approach work? Is money all that the poor need? In their recently published book “Scarcity – Why having too little means so much”, Mullainathan and Shafir explain why giving money to the poor might be the way to go. This blog is about the theory of scarcity, and its implications for development aid.

Mullainathan and Shafir define scarcity as “a subjective sense of having more needs than resources”. Next to a lack of money, a sense of scarcity can arise due to other aspects, such as too little time or loneliness. The two scholars explain that a feeling of scarcity changes our fundamental mental capacities. More specifically, it reduces our cognitive capacities (which help us solve problems, think logically, and so on) as well as our executive control (which helps us plan, focus our attention, exert self-control, etc).

The effect of scarcity means that a poor person living in the Netherlands might also make the mistake of buying bottled water – but not because she is lazy (as I am), but because she has less mental capacity to exert self-control, and to analyze how this waste of money will put an even bigger strain on her financial situation.

I assume that most if not all readers will recognize being extremely busy for a longer period of time: back-to-back meetings, deadlines, and daunting to-do lists. Mullainathan and Shafir would predict that your mental capacities would decrease during this phase. During this phase you would be particularly likely to underestimate how long meetings will take, overlook dead-lines, or say yes to a new project without taking a step back to really evaluate if you can commit to it. Sound familiar?

Mullainathan and Shafir used natural and lab experiments to assess the impact of scarcity on mental capacities. In one natural experiment, for example, they studied sugar cane farmers. These farmers receive a large sum of money after the harvest, but then find themselves scrambling to make ends meet about a year later, before the next harvest. This means that these farmers experience scarcity before the time of harvest. With this study and many lab experiments, Mullainathan and Shafir found that the effects of scarcity on our mental capacities are substantial. While most pop science books would leave it at that – Mullainathan and Shafir do a great job at actually indicating effect sizes. They explain that the effect of scarcity on human’s mindsets is comparable to skipping an entire night of sleep. Also, scarcity leads to the IQ to drop by about 13 points. This is enough for someone to go from the category ‘average’ intelligence to ‘borderline deficient’.

This means that people experiencing scarcity – say someone living in poverty – are doubly burdened. They have to deal with not having enough money, combined with reduced mental capacities. Mullainathan and Shafir claim that this explains why the poor remain poor, why the lonely remain lonely, or why the busy remain busy. Moreover, they recommend public policies that relieve people of their sense of scarcity. This is exactly what the above-mentioned charity GiveDirectly is doing by providing cash transfers to poor families. And it seems to be working. A rigorous randomized control study concludes that “poor recipients spent the money on a broad variety of items, including food, shelter, and productive assets, leading to significant improvements in income, food security, and psychological well-being.” If Mullainathan and Shafir’s are right, then this intervention will not only lead to psychological well-being, but an increase in mental capacities. And this, as argued above, is key in order for the poor to be able to become less poor.

So are cash transfers the way to go? They are certainly “in” at the moment. At the same time, critics have claimed that the evidence for cash transfers to the poor is overrated, mainly pointing towards limited cost-effectiveness and a lack of evidence of long-term impact.

Cash transfers are – just like any other development approach – not the silver bullet (for more on this see various posts by the great blogger Chris Blattman). However, Mullainathan and Shafir’s research on scarcity defies the conservative logic that everyone can lead a good life if they just try hard enough. The poor are not poor because they are incapable, but because – amongst other constraints – the experience of scarcity makes them less capable.

So, in spite of the criticism of cash transfers, I have decided to stop buying bottled water, and to GiveDirectly.

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Vera Schölmerich MSc is a PhD Candidate at the Department of Obstetrics and Gynecology of Erasmus Medical Center and at the Department of Organization Sciences of the VU University Amsterdam. Vera is also an Assistant Professor at Erasmus University College, where she teaches research design and methods.

5 thoughts on “Why the poor remain poor”

Thanks for this great column! Indeed “The poor are not poor because they are incapable”. Do you know the book “The culture of inequality” by Michael Lewis? Analyzing the situation in the USA, he convincingly counters the general belief in individual deficiency explanations for the existence of poverty.